Skip to content

Advisor Perspective

Advisor Perspective

Various State Income Taxes: The Good, the Bad, and the Downright Ugly

Will Alexander

Advisor, CFP®, J.D.
Will anticipates clients’ complex needs proactively and responds to them quickly, helping them preserve and grow assets with thoughtful, custom solutions. He’s passionate about empowering individuals and families to fulfill their goals and dreams and appreciates the opportunity to share in those experiences.

Read Will's Bio →

When choosing where to live there are many factors that we take into consideration: proximity to friends and family, career opportunities, geographic/climate preferences, etc. While many of these choices are preferential to the individual, there is another factor that is likely unanimously one-sided: Cost of living. Who wouldn’t prefer it to cost less to live where they desire? In this article, we will be diving into one specific aspect of that cost: income taxes. The states levy these taxes in various fashions, thereby creating significant disparity between them.

First, there are seven states that do not levy any income taxes whatsoever: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Another positive of these no-tax states is that there is no tax return required to be filed. Rounding out the list of favorable states are Washington, which only taxes capital gains over $250,000, and New Hampshire, which only taxes interest and dividends. One final thought here – income is only one of the ways states levy taxes to generate revenue, so it is important to also consider the other taxes for things like property ownership, sales of goods/services, and estate/inheritance.

Other than the effectively/nearly 0% tax rate of the above states, income tax rates range from Arizona’s 2.5% up to a high of California’s 14.4%. A large majority of states fall between 4% and 6%. There is also the factor of progressive systems vs. flat rates. About a dozen states impose a fixed or flat tax rate on income, such as Illinois at 4.95%. Whereas a progressive system, similar to federal taxes and the aforementioned California, segments the income into brackets and charges an increasingly larger percentage as those brackets are filled. Continuing with California as an example, that 14.4% rate only applies to the income that exceeds $1,000,000. The effective tax rates that would get applied to the income for these states could vary wildly depending on the amount of income.

Next, there is the matter of whether a state has county or city taxes, as well. This is an often-overlooked factor in determining total tax rates and can make a seemingly low tax state closer to average or worse. Take Indiana for example: it has a comparatively low flat tax rate of 3.23%. County taxes for the state, however, range from 1% to 2.9%. An effective tax of 4.23% would still be considered low, but increasing it to 6.13% would now be considered rather high compared to other states.

Lastly, it is important to note that not all states tax all types of income. While Washington and New Hampshire opted to only tax one type of income, many states have opted to exclude specific income from being taxed. This is namely retirement income. All but 12 states have opted not to levy a tax on social security, and a few (aside from the no tax states) have also decided not to tax pensions and/or 401(k)/IRA distributions. For a retiree, it is possible that a significant portion of income is derived from these sources.

For planning purposes, all this complexity creates potential opportunity. Planning a change in residency and expecting a big windfall of income? You may want to delay or expedite that move to save on the taxes. Moving from a state that doesn’t tax retirement income to one that does? You may look to distributing from the IRA earlier or completing a Roth conversion. Comprehensive planning seeks to provide clarity about the financial impact of the options life presents such that a decision can be made in a more informed way and the effect on state taxes is one of those impacts. Please contact your JMG advisor with any questions that you might have. We invite you to share this article with others who may also find it helpful.

Important Disclosure

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by JMG Financial Group Ltd. (“JMG”), or any non-investment related content, made reference to directly or indirectly in this writing will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this writing serves as the receipt of, or as a substitute for, personalized investment advice from JMG. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. JMG is neither a law firm, nor a certified public accounting firm, and no portion of the content provided in this writing should be construed as legal or accounting advice. A copy of JMG’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a JMG client, please remember to contact JMG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. JMG shall continue to rely on the accuracy of information that you have provided.

To the extent provided in this writing, historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices. Indices are not available for direct investment.